A troubling sign has emerged among some of the biggest names in technology as a result of their most recent earnings announcements. Aggregate demand in the form of meaningful revenue growth appears to have vanished. Unfortunately, there’s only so far you can cut expenses to drive new levels of profitability before investors start to recognize there’s a potentially serious problem.
Anemia on the rise
Although International Business Machines Corp. (NYSE:IBM) managed to satisfy investors by upping its full-year earnings guidance, Big Blue reported a year-over-year revenue decline of 3.3% to $24.9 billion, which translated to a net income decline of 16.9% in the second quarter. After adjusting for currency fluctuations, International Business Machines Corp. (NYSE:IBM)’s revenue would have only declined by 1%. As far as earnings guidance is concerned, the company raised its full-year outlook by $0.20 a share to $16.90, above the analyst consensus of $16.64 a share. According International Business Machines Corp. (NYSE:IBM) CFO Mark Loughridge, the guidance bump can be attributed to a combination of cost-cutting, “solid” growth prospects, and potential tax settlements. To me, the boost is likely driven more on efficient maneuvering than it is on driving aggregate top-line revenue growth.
For its fiscal fourth quarter, Microsoft Corporation (NASDAQ:MSFT) reported revenue growth of 3% to $19.1 billion, missing expectations by $820 million thanks to continued weakness in the PC market. Even after backing out the $900 million writedown the company took as a result of recent Surface RT price cuts, the company still missed earnings expectations by $0.09 cents a share.
Undoubtedly, Microsoft Corporation (NASDAQ:MSFT) is in a tough spot with the state of the PC market in disarray. Even if Mr. Softy can gain market share in mobile computing, it may not be meaningful for shareholders. That’s because Windows devices with screens smaller than 10.8 inches are believed to command a lower license fee from device markers than normal. Instead of the typical $120 a device maker would pay, they are only believed to paying $30 per device in this size segment. Coupled with the reality that consumers continue to trade down to mobile computing devices with smaller form factors, it doesn’t likely equate to Microsoft Corporation (NASDAQ:MSFT) driving meaningful top line growth in the future.
Last week, Intel Corporation (NASDAQ:INTC) announced that its revenue declined by 5.1% year over year in its second quarter, which translated to net income decline of 29%. But what got investors spooked was that Chipzilla lowered its full-year revenue outlook, which it now expects will remain flat compared to last year. As you can imagine, Intel Corporation (NASDAQ:INTC) is in a similar predicament as Microsoft Corporation (NASDAQ:MSFT), but instead of licenses, its processor business is expected to face revenue pressure as it enters the tablet and lower end computing segment with its upcoming Bay Trail processor. Consequently, Intel Corporation (NASDAQ:INTC)’s profitability will be lower on a per unit and total dollar basis even with constant profit margins.